UN cap-and-trade system: Good for China and India, but who else?

The United Nations-administered cap and trade system to reduce planetary greenhouse gases through investment in “green” projects in developing countries has directed most of its billions of dollars in investments to China and India, two of the world’s most notorious polluters.

Indeed, China and India together have gotten more than 70 percent of the more than 4,100 projects so far registered for the system, while most developing nations, aside from a handful, have gotten hardly any at all, according to the system’s own accounts.

At the same time, critics are charging that the system established under the controversial Kyoto Protocol to combat greenhouse gas emissions, and known as the Clean Development Mechanism, or CDM, is “costly, unpredictable, unreliable, prone to gaming,” and “counter-productive due to perverse incentives,” according to a consultants’ report prepared for the European Commission in Brussels last December.

The question of whether it has, in fact, reduced global greenhouse emissions by the equivalent of some 927 million tons of carbon, as heralded by the carbon reduction certificates tallied on the CDM website is also open to vigorous dispute.

In all, “one gets the impression of a mechanism that has not delivered on its objectives as well as many had hoped,” as the European Commission consultants delicately put it, while they critiqued the cap and trade system’s “lack of transparency,” “inconsistency of decisions,” “conflicts of interest,” and extensive support for “unsustainable technology for emissions reduction.”

At the same time, the study also declared that “in many respects, the CDM can be considered a resounding success,” for, among other things, “positively influencing” awareness of clean technologies, helping developing countries gain experience at controlling greenhouse bases, and “providing a unique laboratory in better understanding how to regulate and support carbon markets.”

In other words, the system is going to continue.

The European Commission study’s on-the-other-hand support for the CDM points to the stark fact that despite deep misgivings, nobody is yet backing away from the controversial system of creating carbon reduction certificates that lies at the heart of global cap-and-trade—and the U.S., which is not yet a participant, may soon be joining in.

The carbon reduction certificates are the U.N.-backed proof that greenhouse gases of various kinds have, in fact been reduced. They trade on exchanges and can be purchased to offset other emissions, and can rise and fall in value depending on demand—assuming always that they are what they represent. A small portion—2 percent—of the certificates are supposed to be set aside for an “adaptation fund” to help vulnerable countries deal with “climate change.”

The CDM is a mechanism created by the Kyoto Protocol--which the U.S. signed two decades ago, but never ratified due to unanimous opposition in the U.S. Senate. Kyoto formally expires this year, however, and the Obama Administration has been heavily involved in the bargaining for the potential successor. Formal negotiations on that successor treaty are expected to begin next year, and the accord itself is expected to be in place by 2015.

Additionally, the Obama Administration has already formally committed to reduce U.S. carbon emissions by 17 percent by 2020, a stance reaffirmed at a U.N. sponsored climate change conference in Durban last December. That target is unlikely to be met without extensive reliance on a cap and trade system.

The most visible symbol of the CDM’s durability is the host of international delegates and experts of various kinds who are meeting in Bonn from May 14 to 25, under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC). Among their aims: to consider ways to extend the cap and trade system to new areas of land use and forestry, in advance of the Rio + 20 Summit Conference on Sustainable Development, which starts in Brazil on June 21.

The goal of the Bonn conference is, among other things, to further refine what the CDM claims to be doing, and bolster its credibility in advance of a new round of climate change negotiations that will start next year to create a replacement for the controversial Kyoto Protocol on combating “climate change,” which expires at the end of 2012.

The conference clearly has its work cut out for it. Among other things, delegates are going to be pondering a research paper on the challenges of combining the reduction of a wide variety of greenhouse gases into a common set of measurements, or “metrics,” essential to a cap and trade system. The paper underlines “the structural and scientific uncertainties of emission metrics, the political and economic uncertainties in the implementation of common metrics, [and] the uncertainties of different policy approaches to deal with GHGs [greenhouse gases],” among other things.

In other words, the researchers are reporting on the great uncertainty attached to all the things that the CDM, with its vast array of “green” projects, each tagged with different numbers of “certified emission reductions” certificates (CERs), representing a ton of carbon that is not released into the atmosphere, is assumed already to be managing successfully, through a huge array of staggeringly diverse “green” projects.

As the CDM’s own numbers show, most of the predominately European investment money that has gone into CDM projects has gone to a relative handful of the most successful rising middle-income nations. After China (48 percent of CDM projects) and Indian (20 percent), these include Brazil (nearly 5 percent), Mexico (3.36 percent), Malaysia (2.6 percent) and rapidly rising Vietnam (2.77 percent).

Virtually none of the projects so far have gone to the poorest countries of Africa, the Middle East, Asia, or other regions that proponents of the CDM initially argued would benefit from the elaborate mechanism to combat “climate change, ” though CDM officials now say they are now pondering ways to change that.

“CDM is a market-based mechanism,” explains a CDM spokesman. “It’s left up to companies to decide whether and where they wish to pursue a project. What has been observed is that the number of projects more or less matches the foreign investment that countries attract.” Part of the logic, the spokesman noted, is that the biggest rapidly industrializing countries, like China and India, have lots of pollution that needs to be abated.

The nature of that abatement has already caused significant controversy, and may be doing more, not less, to increase global carbon emissions and cause other forms of environmental damage.

Included among nearly 2000 CDM projects in China, for example, are roughly 80 that are aimed at destroying a powerful gas known as HFC-23, used in digital chip-making and as a refrigerant. In the arcane calculations of the CDM, a ton of HFC is said to be equivalent to about 11,700 tons of carbon dioxide, and projects that destroy it receive hundreds and thousands of times as many carbon reduction certificates as other projects, such as wind farms or bio-mass disposal.

(The CDM inventory for India includes roughly 30 HFC-23 destruction plans, out of roughly 800 entries.)

The catch is the producing HFC-23 is cheap—so cheap that the reward for destroying it creates an incentive to create even more of the gas—for what some critics have decried as billions of dollars worth of windfall profits. Moreover, because the CDM certificates generated by HFC-23 reduction can be used to offset other carbon emissions, the inflated number of certificates for HFC-23 actually create get-out-of-jail-free cards for larger conventional carbon emissions.

The counter-argument, from a CMD spokesman queried by Fox News on the topic, is that “about half of the HFC-23 produced in developing countries is incinerated; that half covered by the CDM. Without CDM a great deal of a very potent greenhouse gas would be going into the atmosphere.”

The problems with HFC-23 destruction have been known to the CMD, and its parent UNFCCC for years, and have been opaquely discussed at meetings similar to the Bonn conclave—where no consensus on what to do has been achieved. The European Commission has unilaterally declared that it will ban trading in certificates from HFC-23 projects in May, 2013.

UNFCCC bodies studying the problem have not come to a final conclusion.

“The CDM is young, it’s the first of its kind, and it has inspired participation well beyond expectations,” argues the CDM spokesman in defense of the institution. “It is a tool that countries have, now, at their disposal to incentivize investment in emission reduction projects and assist in sustainable development.”

Even if, as the UNFCCC’s own experts report, the “metrics” still need work. Maybe a lot of work.

George Russell is executive editor of Fox News and can be found on Twitter @GeorgeRussell